Barrister Philip H. Barton, of Foley’s List, in the first of a two-part series, discusses damages for breach of lease. This article explores Victorian, Commonwealth and UK case law. Part 2 will look at damages under the Retail Leases Act 2003 (Vic). Philip recently delivered the presentation, Breaches, Damages and Compensation: Legislation, Strategies, Practice and Procedure, at the Legalwise Retail and Commercial Leasing Conference in Victoria. He will also speak on Co-ownership Disputes at the 15th Annual Property Law Conference in March.

Basic Principles

The ruling principle for damages for breach of contract is, that where a party sustains a loss by reason of breach, that party is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed. A lease is a species of contract and so common law damages principles for breach of lease apply. Damages for repudiation of a lease are also assessed in accordance with contractual principles.

As with the general law of contract, some breaches entitle the wronged party to elect whether or not to continue with the lease. Such breaches may be repudiatory, or breach of an essential term, or a serious breach of an intermediate term. Others breaches do not provide this entitlement and accordingly restrict the wronged party to a claim for damages.

Impact Funds Management Pty Ltd v Roy Morgan Research Ltd [2016] VSC 221 reiterates that at common law mere non payment of rent is not repudiatory. However, Croft J also noted that, as prevalent in modern leases and following Shevill v Builders Licensing Board (1982) 149 CLR 620, parties to a lease could equate the result of breach of an agreed fundamental or essential term with the consequences of common law repudiation and acceptance of the repudiation by the innocent party, and so produce the same result in damages. Such a term must be in unambiguous.

Is the award of damages affected by the fact that the landlord will not use them to remedy the effect of the tenant’s breach?

In Joyner v Weeks [1891] 2 QB 31 damages for failure to deliver up premises in repair were awarded notwithstanding that they were in any event to be demolished by an incoming tenant. The court held the ordinary rule to be that where the lessee breached a covenant to repair at the end of the term it must pay what the lessor proved to be a reasonable and proper amount for putting the premises into the state of repair in which they ought to have been left.

Underlying the litigation approximately 10 years ago between Bowen Investments Pty Ltd and Tabcorp Holdings Ltd, Bowen had constructed an office building with a striking foyer which it leased to Tabcorp who demolished the foyer replacing it with a new foyer. The Full Court of the Federal Court awarded the landlord the full cost of restoring the foyer to its original condition ($580,000) and $800,000 for loss of rent during that restoration (Bowen Investments Pty Ltd v Tabcorp Holdings Ltd (2008) 166 FCR 494). Finkelstein and Gordon JJ noted:

(a) If an action for breach of a covenant to keep and leave premises in repair, or of a covenant prohibiting alterations or additions without approval, is brought while the tenancy continues, the general rule is that the damages represent the diminution in the value of the reversion not the cost of repair because the landlord is not bound to expend any money recovered. But if the action is brought at or near the termination of the lease, the rule in Joyner v Weeks is that the landlord is entitled to recover the cost of repairs including loss of rent during the repair period with some deduction, if appropriate, for betterment. This rule applies unless the lessee can show by sufficiently cogent evidence that the lessor will definitely suffer no loss or will suffer a loss which can definitely be assessed at less than the prima facie measure;

(b) However, damages are assessed on a different basis in the case of breach of a covenant to reinstate premises at the end of the term. The court is required to determine: (a) what loss the landlord suffered and what damages are necessary to place the landlord in the same position as if the contract had been performed; and (b) where the cost of reinstatement is claimed, whether the insistence on reinstatement is reasonable.

The High Court (Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272) reached the same result as the Full Court through different reasoning. It reasoned –

(a) The ruling principle (ie to place the wronged party in the same situation as if the contract had been performed) did not mean “as good a financial position”. In cases where the contract was not for the sale of marketable commodities, selling the defective item and purchasing an item corresponding with the contract was not possible: damages simply representing the diminution in value of the property were insufficient;

(b) The landlord was contractually entitled to the preservation of the premises without alterations; its measure of damages was the loss sustained by the tenant’s failure to perform that obligation; and that loss was prima facie the cost of restoring the premises to the condition in which they would have been if the obligation had not been breached;

(c) However, the required work must be both necessary to produce conformity with the contractual obligation and a reasonable course to adopt. The test of unreasonableness was, however, only to be satisfied by fairly exceptional circumstances.

In Fenridge Pty Ltd v Retirement Care Australia (Preston) Pty Ltd [2013] VSC 464 a nursing home was not delivered up in good repair at the end of the lease, but due to other action of the erstwhile tenant the landlord could not continue the nursing home and profitably redeveloped it as an apartment complex. Hargrave J nonetheless held Fenridge entitled to recover the cost of performing the precise works which were reasonably necessary to bring the premises up to the state they would have been in had the tenant complied with its make good obligations during and at the end of the lease (not in fact paid because of overlap with damages for lost opportunity).

Damages – loss of opportunity by the landlord

In Fenridge the landlord obtained an award of damages for loss of opportunity of having the nursing home building assessed for government-funded residential aged care services on the basis that it was an existing building. Fenridge, however, was obliged to take reasonable steps to mitigate its loss. This had not required it undertake the apartment development but having done so the net profit from that development should be taken into account.

Set off by tenant of claims for damages against rent

M.E.K. Nominees Pty Ltd v Billboard Entertainments Pty Ltd (1993) V ConvR 54-468 and Barfly’s Nominees Pty Ltd v Manthos [2003] VCAT 1941; [2003] VCAT 1987 both concerned Melbourne night venues. In M.E.K. Nominees an application by a landlord for final judgment for possession for non-payment of rent was defeated by an arguable equitable setoff for unliquidated damages arising from (in breach of the covenant for quiet enjoyment) flooding of part of the premises with sewerage from a malfunctioning installation elsewhere on the landlord’s property. In Barfly’s Nominees a lessee who had not paid rent obtained an interim injunction against eviction on the basis of a serious question to be tried of the landlord breaching an obligation to repair.

Claims against Bank Guarantees/Bonds

Litigation concerning bank guarantees and bonds largely also involves attempts by lessees to enjoin recourse to the same. In Otter Group Pty Ltd v Wylaars & Anor [2013] VSC 98 the lease required the tenant to provide security against breach of the lease by depositing with the landlord a specified sum, which it did in the form of a bank guarantee. The lease provided that if the tenant failed to pay rent or other money payable under this Lease or if the landlord sufferred loss or damage because of any other breach of the lease the landlord may use the security deposit towards paying the arrears of rent or other money or towards repairing the loss or damage. A dispute arose as to whether the lessee had returned the premises in the required condition and whether it was overholding. While a mediation was on foot the bank at the request of the lessor paid to the lessor virtually the whole amount of the bank guarantee. An interim injunction restraining the landlord from dealing with the proceeds of the guarantee was discharged. Hollingworth J applied the general rule that, subject to fixed exceptions which did not apply here, a court would not enjoin the issuer of a performance guarantee from performing its unconditional obligation to make payment.

Philip H. Barton has practised as a barrister for many years. He practises in Commercial Law generally and particularly in Property Law and Probate. He has written numerous articles, including in the Australian Law Journal and approximately annually in the Law Institute Journal. He is the author of the caveatsvictoria.blog.